Scope Of Employees Under ESOP

Sec 2(37) of the Companies Act, 2013 defines “employees stock option” read with Sec 62(1)(b) of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. This Rule specifies that on complying with certain terms and conditions only the unlisted company can offer shares to its employees under ESOP

a) A permanent Employee of the Company, whether, working in or outside India; or

b) A Director of the Company, whether a Whole Time Director or not but excluding an Independent Director; or

c) An Employee as defined in Clauses (a) or (b) above, of a Subsidiary, in India or outside India, or of a Holding Company of the Company.

But does not include:

  1. An Employee who is a Promoter or a person belonging to the Promoter Group; or
  2. A Director who either himself or through his relative or through any Body Corporate, directly or indirectly, holds more than ten percent of the outstanding Equity Shares of the Company.

Procedure for Issue of ESOP

The following general procedure for issuing ESOP to the employees:

1) Hold a board meeting to consider the proposal of the ESOP scheme & setting up of trust in case the ESOP scheme proposed is to be implemented through trust.

2) Board committee or trust as the case may be shall draft the scheme of ESOP keeping in mind the following points:

  • Quantum of ESOP to be granted
  • Employee identification & evaluation process to be followed for selecting eligible employees
  • Vesting period
  • Exercise period
  • Valuation process to be followed
  • Total no of shares to be issued


3) Hold a board meeting to adopt the final scheme & to approve the notice of the general meeting for passing of special resolution along with the explanatory statement as mentioned in Rule 12 of the Companies (Share Capital & debentures) Rules, 2014

4) Hold a general meeting for approval of shareholders & file MGT-14

5) Issue a letter of grant of option to the eligible employees mentioning all the details of the scheme & its terms and conditions

6) A vesting period of a minimum of one year & after completion of the vesting period eligible employees can exercise the option.

7) Allotment of shares & issue of share certificate or credit the shares so allotted.

The explanatory statement to be annexed to the notice of the general meeting to be convened pursuant to Section 102 Companies Act, 2013 shall include the following details:

1) The class of employees for whose benefit the scheme is being implemented and money is being provided for the purchase of or subscription to shares;

2) The particulars of the trustee or employees in whose favor such shares are to be registered; the particulars of trust and name, address, occupation, and nationality of trustees and their relationship with the promoters, directors, or key managerial personnel, if any; any interest of key managerial personnel, directors or promoters in such scheme or trust and effect thereof;

3) The detailed particulars of benefits that will accrue to the employees from the implementation of the scheme: the details about who would exercise and how the voting rights in respect of the shares to be purchased or subscribed under the scheme would be exercised

4) A person shall not be appointed as a trustee to hold such shares if he/she

  • is a director, key managerial personnel, or promoter of the company or its holding, subsidiary, or associate company or any relative of such director, key managerial personnel, or promoter;
  • beneficially holds ten percent or more of the paid-up share capital of the company.


Steps for the creation and administration of ESOPs

Step 1: Constitution of a Compensation Committee by the board

Step 2: Framing of the ESOP Plan

Step 3: Approval of the ESOP plan by the board and requisitioning a general meeting

The ESOP plan requires the Board’s approval. Following this, a general meeting of the company must be requisitioned.

Step 4: Shareholder approval

In terms of the ESOP, when an employee exercises his option, the company is bound to issue shares pursuant to the same. Whenever shares are issued to a specific person and not proportionately to all the shareholders of the company, the company must obtain shareholder approval by a special resolution (3/4″ of the shareholders present and voting), as per the Companies Act, 2013.


In order to obtain shareholder approval, the following steps need to be followed:

  • Notice of the general meeting must be given to shareholders 21 days prior to the meeting
  • A special Resolution is required to be passed at the general meeting, for approval of the issue of shares upon the exercise of options
  • Filing of the special resolution with the Registrar of Companies, along with Form MGT-14 on the MCA website.
  • Informing the stock exchanges of the approval (in the case of a listed company)

Step 5: Compensation Committee meeting for grant of options and related formalities

A meeting of the Compensation Committee must be held to determine the names of employees to whom the options shall be granted. Letters of grant shall be issued to the employees. The committee must ask for letters of acceptance of the options, and an undertaking from employees to comply with the ESOP scheme.

 Legal Documentation associated with ESOPs

1. Employment agreement – The employment agreement usually specifies that the board has the discretion to grant such options to the employees as it deems fit.

2. ESOP Plan – The ESOP Plan is the plan that lists out the features and the terms of the ESOP scheme.

3. Trust Deed (if the ESOP is administered by a trust) – If the trust route is used for the ESOP Plan, a trust deed for the creation of a trust to hold the shares is required.

4. Letter of grant of options – Options are conferred by a letter to the employees furnished by the board of directors of the company.

5. Letter of acceptance by employees.


Key compliance requirements post-exercise of options 


 1. TDS- Deduction of tax at source by the company and submission of the tax to the Income Tax Department (see discussion below on Tax Issues Related to ESOPs) Allotment of share certificates

2. Allotment of share certificates by the board to the employee

3. Filing with ROC- Since shares are issued if stock options are exercised, the company must file a return of allotment (in Form No. SH.7) online with the Registrar of Companies.

4. Register of ESOPS- Maintain a register of ESOP (Form No SH-6) as per the Companies Act, 2013.

5. Listing application with stock exchanges (only for a listed company) Submitting an application to the stock exchanges for a listing of shares issued pursuant to the exercise of options.

6. Form PAS –3 Filing within 30 days of allotment (for issuance of shares when options are exercised).

7.  Director’s report statement – Required to be prepared after 1 year.

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